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Should I Payoff Off My Mortgage?

In addition to holding a Florida real estate license, I am also a Florida registered investment advisor. In my financial planning practice I am often asked, "Should I pay off my mortgage"? The simple answer is yes, but it depends on your personal financial circumstances. Most advisors will not "promote" paying off a mortgage, as they have no way of generating revenue from the equity invested in your home. It also depends on how much "liquidity" you have with other investments. For the past two decades, I have dealt mostly with retirees planning their income and managing their investments. When someone is living on a "fixed" income, it is important to have as little debt as possible. Some may argue with the fact that you might be better off having a mortgage for "tax benefits," and in this low interest rate environment investing the difference in the stock market. (Risky!) Here are two scenarios with and without a mortgage:

Under Scenario No. 1, you have a $400,000 mortgage at a 4% interest rate. You pay $16,000 annually in interest and may get a $4,800 tax deduction at the 30% marginal tax rate. Your net cost: $11,200. Meanwhile, you invest $400,000 in a conservative investment-grade bond fund paying 2.5%. You earn $7,000 after a $3,000 tax bill.

Under Scenario No. 2, you pay off the mortgage and lose the $7,000 in after-tax bond interest. But you save $11,200 in after-tax interest payments. You come out on with $4,200. Yes, most will likely pay more in taxes, but it is more important to earn more money after taxes! Furthermore, taxpayers may not necessarily take full advantage of the mortgage interest deduction. For those with relatively modest incomes, some of the interest deduction may not help as it only gets them to the standard deduction.

I had one of my financial clients tell me that advising them to pay off their mortgage, was one of the best pieces of professional advice they had ever received. They followed up by saying, "We now have more discretionary income on a monthly basis to travel and do more things for our children and grandchildren."

If you, or someone you know is looking to sell, buy, or invest into real estate in the near future, please contact us at Hearon Realty Group. We appreciate the opportunity to assist you, your family, or friends with all yours or their real estate needs!

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